Essel Group's high-yield papers attract MFs as inflows push up demand

Fund houses have exposure of Rs 8,002 crore to such securities in the company

Essel Group firms offered upward of 12 per cent yield on securities that mutual funds (MF) invested in, according to filings with the Registrar of Companies.
 
Industry experts say that the recent inflows into credit opportunity funds helped create a pool of capital, which pushed up demand for such high-yield securities.
 
This has ultimately resulted in Rs 8,002 crore worth of exposure for the MF industry as of December — all under a cloud as liquidity constraints have hit the group.
 
A crash in Essel (or Zee) group shares prompted chairman Subhash Chandra to write an open letter on debt issues, which he stated are being resolved through various steps including stake sales.
 
No default has happened yet, he said, adding that he is in conversation with lenders to address these issues.
 
MF tracker Morningstar compiled asset managers’ Essel exposure. The biggest borrowers were two privately-owned Chandra firms — Sprit Textiles and Adilink Infra & Multitrading. They together account for Rs 3,050 crore in borrowings. This is nearly 40 per cent of the MFs’ Rs 8,002 crore exposure at December-end.

 
A bulk of the borrowing was in high-yield paper. “Rs 750-crore 13.25%, unrated, unlisted, redeemable non-convertible debentures are issued having maturity on 28 March, 2020,” said a note to the Adilink Infra & Multitrading financial statements, for FY18.
 
Interestingly, these debentures were not against the collateral of listed shares; the collateral was unlisted shares.
 
The other big lender, Sprit Textiles, also seemed to have high borrowing costs. A note to the 2017 financial statements noted that loans from banks and financial institutions were at a cost of 9.95 per cent to 14.25 per cent. It had mentioned MF borrowings of Rs 700 crore at a rate of 12.25 per cent.

This yield is significantly higher than other corporate bonds. A broad comparison can be done with yields on ten year triple-A (AAA) rated corporate bonds. They had yields between 7.14 per cent and 9.76 per cent over the last five years, according to Bloomberg.
 
Double-A (AA) rated bonds had a range between 7.67 per cent and 10.11 per cent over the same period. The Essel group, in an emailed response to questions from Business Standard, said the MF exposure had reduced to Rs 6,500 crore in late January. 
 
“Dividends from operating cash flows and asset monetisation are being used to meet interest obligations from time to time,” said an Essel group spokesperson.
 
An analysis of the latest available financials of Sprit Textiles and Adilink Infra & Multitrading showed losses for both. Sprit had a loss of Rs 263.3 crore as of March 2017 (FY17).  Adilink, too, had losses of Rs 52,000. The company was set up only in FY18.
 
The losses could be attributed to the companies being holding entities. Such firms are used as vehicles for either investment or borrowings. Adilink’s losses comprised of Rs 51,000 in finance costs.
 
The finance costs for Sprit were Rs 263 crore. The financials are based on RoC filings.
 
The investment in such high yield papers is also because of the changing industry, said experts. There is so much money coming in to the industry that MFs are chasing papers that are often riskier than those that they would have otherwise invested in, said the head of fixed income at one mutual fund.
 
Kaustubh Belapurkar, director (fund research), Morningstar Investment Adviser India, said the rise in funds geared towards higher-yielding paper in recent years, was what created demand for such securities.
 
“If you track the assets in the credit risk funds, there has been a fairly steady rise since 2012-13, so it is natural there will be more money chasing such securities. From the borrower’s perspective, they have also been willing to pay a higher yield for the cushion of higher liquidity due to the recent turbulence in debt markets.  This means more investors get into these securities when yields are attractive from a risk-reward perspective,” he said.
 
He added that many fund houses have large and growing research teams. They also create covenants including promoter guarantees to ensure additional layers of safety. Some instances of turbulence cannot be ruled out despite these safeguards because of the nature of the investments, and the mandate of many schemes to invest in high-risk securities, he added.
Ramanathan Krishnamoorthy, founder and chief executive officer of Spectrum Wealth Solutions, who has also managed funds as chief investment officer at a fund house said that recent issues are likely to affect recent investor interest for such funds.
“From the investors’ point of view, there is going to be much lower interest in credit risk funds. Investments are likely to flow into higher rated paper,” he said.